FB Financial Corporation — Q1 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2021, with balance-sheet comparisons to December 31, 2020 and operating results compared with Q1 2020. Nashville-based FB Financial operates FirstBank, with 81 branches across Tennessee and nearby states, and a national mortgage business. Results include the effects of the 2020 Franklin and Farmers National acquisitions; 2020 comparisons also reflect the pandemic’s initial effects. Segment reporting was realigned so all retail mortgage activity is included in Mortgage, and prior-period segment figures were revised.
Key financial results and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior balance |
|---|---|---|
| Net income | $52.9 million; diluted EPS $1.10 | Q1 2020: $0.7 million; diluted EPS $0.02 |
| Net interest income | $82.6 million | Q1 2020: $56.2 million |
| Net interest margin, tax-equivalent | 3.19% | Q1 2020: 3.92% |
| Noninterest income | $66.7 million | Q1 2020: $42.7 million |
| Noninterest expense | $94.7 million | Q1 2020: $68.6 million |
| Total assets | $11.94 billion | December 31, 2020: $11.21 billion |
| Total deposits | $10.26 billion | December 31, 2020: $9.46 billion |
| Cash and cash equivalents | $1.90 billion | December 31, 2020: $1.32 billion |
| Loans held for investment | $7.05 billion | December 31, 2020: $7.08 billion |
| Allowance for credit losses | $158.0 million, or 2.24% of loans | December 31, 2020: $170.4 million, or 2.41% |
| Shareholders’ equity | $1.33 billion; book value $28.08 per share | December 31, 2020: $1.29 billion; $27.35 per share |
| Borrowings | $180.2 million | December 31, 2020: $238.3 million |
Profitability and drivers. The $52.9 million of earnings included a $13.9 million reversal of provisions for loan and unfunded-commitment credit losses, versus $29.6 million of provision expense in Q1 2020. Mortgage banking income rose to $55.3 million from $32.7 million. Mortgage sales were $1.57 billion, with a 3.68% sale margin, compared with $1.04 billion and 2.92% a year earlier. The GAAP efficiency ratio improved to 63.4% from 69.3%; the adjusted, tax-equivalent ratio was 63.0% versus 65.7%.
Cash flow, liquidity and capital. Operating activities used $172.2 million of cash, compared with $101.7 million used in Q1 2020, largely reflecting mortgage-loan originations and related working-capital movements. Financing activities provided $734.6 million, mainly from deposit growth; cash increased $577.2 million during the quarter. The company reported a 10.1% Tier 1 leverage ratio, 12.0% CET1 ratio and 14.6% total risk-based capital ratio at March 31; FirstBank met applicable capital requirements. Management said liquidity was adequate and reported $1.29 billion of available FHLB borrowing capacity and $345 million of unsecured, uncommitted bank lines, with no borrowings against those lines.
Material changes versus comparable periods
- Earnings increased substantially from Q1 2020, but comparisons are heavily affected by the $13.9 million credit-provision release in 2021 versus the prior-year build, as well as 2020 merger costs of $3.1 million.
- Net interest income grew with acquisition-related loan volume and lower deposit costs, while tax-equivalent net interest margin declined 73 basis points to 3.19%, reflecting historically low rates, balance-sheet mix and excess liquidity.
- Noninterest expense increased $26.1 million year over year, including higher employee costs, mortgage commissions and acquisition-related headcount. Full-time-equivalent employees rose to 1,882 from 1,475.
- Nonperforming assets increased to $91.4 million from $84.2 million at year-end; nonperforming loans held for investment were $66.2 million, or 0.94% of loans, versus $64.5 million, or 0.91%, at year-end.
- Accumulated other comprehensive income fell to $16.1 million from $27.6 million, mainly reflecting a quarterly unrealized loss on available-for-sale securities.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management was cautiously optimistic about improving economic activity but said activity remained below pre-pandemic levels and the pandemic’s longer-term effects were uncertain.
- Mortgage: Management expected mortgage production, particularly refinancing, to decline during 2021 as interest rates rise, potentially materially affecting mortgage profitability. Mortgage lock volume was down year over year despite higher sales and margins in the quarter.
- Credit and COVID-19: The reserve release reflected improving forecast assumptions, not a guarantee of future credit performance. Management noted continuing uncertainty around the pandemic and economic forecasts. Loans remaining in COVID-related deferral status were $152.2 million, down from $202.5 million at year-end.
- Interest-rate exposure: The company described itself as asset-sensitive. Its modeled 12-month net interest income increased 12.1% under an immediate +100-basis-point scenario and decreased 7.4% under a −100-basis-point scenario. These are model estimates dependent on assumptions, not forecasts.
- Other risks: Disclosed risks include integration and realization of merger synergies, credit quality, local economic and real-estate conditions, interest rates, cybersecurity and third-party technology, and the LIBOR transition. Management noted potential lower ATM interchange income if assets remained above $10 billion in the second half of 2021.
- Unusual items and capital actions: The company redeemed $40 million of subordinated notes during the quarter. It authorized a share-repurchase program of up to $100 million, expiring March 31, 2022; no shares had been repurchased by quarter-end. A $0.11-per-share dividend was declared after quarter-end. No material pending legal proceedings were reported; management said disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and the lower allowance reflected improved underlying credit performance versus changes in economic forecasts and CECL assumptions.
- Whether nonperforming loans, criticized/classified exposures, TDRs and remaining COVID-related deferrals improve or deteriorate, particularly in commercial real estate and other higher-risk industries.
- Whether mortgage production, sale margins and servicing-rights valuations hold up as rates rise and refinance activity declines; mortgage servicing rights were a Level 3 fair-value asset of $104.2 million.
- How excess cash and deposit growth affect future net interest margin, and whether modeled asset sensitivity is borne out under actual deposit and loan repricing.
- Progress on Franklin integration, expense control and merger-related benefits, along with the effects of the planned buyback, dividends and subordinated-debt costs on capital.